The League did not take a position on the proposed policy change because there are different implications for cities throughout California. Cities citing extreme financial hardship raised concern that reducing the amortization schedule will increase their employer contribution rates even beyond what they can afford. Some cities support this change because they believe it is prudent to shore up the fund and pay down the unfunded accrued liability (UAL) faster instead of pushing the financial burden to future employees, employers and taxpayers.
Details on Amortization Policy
The amortization modification is only for prospective accumulation of amortization. This means that meaning that current accrued unfunded liabilities will not change from where they are currently.
The five-year phase in for the recent discount rate reduction was not modified.
CalPERS retained the “ramp up” policy for investment gains and losses. However, it eliminated the “ramp down” provisions, which creates a more stable payment for cities. Under the previous policy, gains and losses phased in over five years. This resulted in significantly higher payments for 20 years then ramped down (lower payments) for the last five years. Under the policy CalPERS adopted on Feb. 14, ramp up for gains and losses remains however the ramp down is eliminated. The new structure is the initial phase in over five years (still) then moderately higher payments for 25 years.
The amortization policy changes will be reflected in cities' June 2019 valuation reports, however, city budgets will not be impacted by the newly adopted policy until FY 2021–22. Cities that want to adopt the amortization sooner to capture the recent above market returns can work directly with CalPERS staff.
CalPERS has a current “hardship” criterion for agencies who are unable to meet a reduced amortization schedule. This criteria is complex and would be difficult to navigate. CalPERS has confirmed that this criteria will be revisited to address those cities that are unable to make their payments and/or would have to significantly reduce services to make their payments. The revisions would allow such cities to opt to use a 30 years amortization schedule.
Proposed Options for Cities
The League proposed two options to CalPERS to address the challenges some cities may face under the new schedule. As of Feb. 14, these options were not adopted. However, the CalPERS Board as well as the CEO have committed to working with the League to revisit their current hardship policy prior to the implementation of the amortization schedule to enable more local flexibility. The League will continue to advocate for the options detailed below:
Option 1: Amortization Opt Out for Distressed Agencies
The current amortization policy allows for an opt-in provision for agencies that choose to adopt a 20-year amortization schedule. CalPERS has stated that agencies seldom use this option. An alternative would be an opt-out provision whereby all agencies are converted to a 20-year amortization schedule that include a clear and definable opt out provision for agencies who are unable to make the anticipated increased payments resulting from a shorter amortizations period.
This concept differs from the current “Fresh Start” option. Fresh Start allows agencies to aggregate their assumptions to the lower amortization denominator. This opt out provision would allow a financially distressed agency to continue the same course of a 30-year amortization schedule for all gains and losses.
As an option, such criteria would need to be carefully crafted to include appropriate stakeholder outreach to ensure that agencies are not forced to reduce public services past acceptable levels for residents.
Option 2: Tiered Systems for Agencies Depending on Fiscal Health
CalPERS staff did not recommend a 25-year schedule. However, such timing still falls within acceptable industry standards. The League suggested that the CalPERS Board may consider a tiered system whereby agencies that are deemed capable of affording a 20-year schedule would be placed in that amortization tier.
Agencies that are struggling can be placed in a 25-year amortization period and agencies who are deemed to be in significant hardship can opt out to remain on a 30 year amortization period.
This criteria could only be crafted with appropriate stakeholder input.
The League’s letter to the CalPERS Board is available online